Phase one trade deal could be less than market hopes: ‘Tariffs have now become a roach motel’

Investors have been waiting for details of the “phase one” trade deal, expected to be signed between the U.S. and China Wednesday, but they may already know most of what’s in it and there may be little new.

Stocks have been buoyed by optimism around the deal for weeks now. Tuesday was no different, and the Dow, Nasdaq and S&P 500 were at all-time highs before a trade-related headline from a news service rattled markets and sent the indexes into negative territory.

Analysts have said there could be some volatility around the release of the trade deal details. An agreement that is very light on details with no teeth to stop trade abuses could potentially be seen as a negative. So stocks were rattled, when Bloomberg news service Tuesday afternoon reported that tariffs were not expected to be lifted until a phase two deal.

The report also said the phase two deal was not expected until after the November election, but strategists say that was not a surprise, and a market, looking to sniff out a positive surprise, was dealt a temporary setback.

The deal is expected to stop any further tariffs and roll back some 15% tariffs to 7.5% on some Chinese goods.

“There’s always ‘buy the rumor, sell the news.’ Part of the reason why we had this tremendous, incredible rally last year and especially toward the end of the year, and why we got off to a good start this year, was we had a raft of good news, on earnings, and also on China trade,” said Ed Keon, chief investment strategist at QMA. “Stocks are not cheap and any bit of news could have an impact on the market.”

Tom Block, Washington policy analyst at Fundstrat, said it is unusual for there to be so few details on a deal that is about to be signed. “Everything I’ve read, and everyone I talked to has said this was basically a standstill agreement with some side things, and we now know one of those side things was that the U.S. dropped that China was a currency manipulator,” he said. “I don’t think that’s a coincidence.”

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Block said the deal could still be being finalized, and if there is a sticking point it could be over how China’s commitment to buying U.S. agricultural products was to be worded. He expects to see an agreement on Chinese purchases of agricultural and energy products. There could also be some language protecting U.S. intellectual property.

“This is a real cease-fire. This is the most substance of cease-fire that we’ve seen,” he said.

Peter Boockvar, chief investment officer of Bleakley Advisory Group, said there was really nothing new in the headline. Stock indexes fluctuated, with the Dow moving back to positive territory.

“It’s not surprising. There was no blueprint to remove the tariffs. We saw that upon the announcement of a deal when they slightly trimmed some of the tariffs from 15% to 7.5% even though they left tariffs on all the existing goods,” Boockvar said. “The assumption was the tariffs would not come off until there was a phase two deal and Trump said the other day there would be no phase two until the after the election. It was always my belief they would not come off until we got a phase two deal. We’re still stuck with these tariffs which are a drag on growth in trade and manufacturing.”

“These tariffs have now become a roach motel,” said Boockvar.

Keon said the market is not really looking for much more on the trade deal. “It looks like we’ll agree to take some tariffs down. We already took them off the currency manipulator list. They’re going to agree to buy some agricultural products., There’s probably some language that says they’ll cooperate on intellectual property. It’s my guess there will be some vague language.”

Block said Trump will leave the door open for further tariffs on Europe but he is not likely to launch any new ones just now.

“He wants NATO to do more in the Middle East, and it’s hard to do that if you’re escalating the trade war,” said Block.

Sourcehttps://www.cnbc.com/2020/01/14/phase-one-trade-deal-could-be-less-than-market-hopes-tariffs-have-now-become-a-roach-motel.html

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